The fear of recession has been keeping consumers and stock market investors on their toes. The impact of the U.S.-Canada tariff war will gradually start reflecting at the nearest grocery store. Loblaw (TSX:L) is running out of pre-tariff inventory. It has already listed over 1,000 items affected by tariffs, and this list is set to grow multifold.
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Why is this stock recession-resistant?
Tariff-affected items account for a small portion of Loblaw’s products stocked in the stores.
Moreover, Canada’s counter-tariff policies could ease the price pressure and make the effective tariff rate zero. Here’s how.
- Canada is not charging counter-tariffs on products on which it heavily depends on the U.S.
- It has also suspended counter-tariffs on several U.S. goods used in Canadian manufacturing, processing, and food and beverage packaging.
- Moreover, it is imposing counter-tariffs on items that have Canadian alternatives.
If you analyze the measures, a smart shopper can navigate their way to tariff-induced inflation and keep their daily expenses in check.
Since Loblaw is a grocery chain that sells food and medicine, its sales continue even in the apocalypse. A recession could probably slow demand for any high-ticket items, but the demand for everyday items will be sustained.
A rise in consumer demand could help Loblaw earn more. In 2021, Loblaw stock surged 65% as consumer spending increased despite rising inflation. Lower inflation and high consumer demand saw Loblaw’s next stock growth cycle of 70% in 2024. While fears of recession pulled down several stocks, Loblaw’s share price surged 23% since February despite the tariff imposition.
Why buy this stock for $2,600?
Loblaw’s stock price movement has been the opposite, mostly outperforming the market. The discount retailer’s stock price surged 238% in the last five years, outperforming the TSX Composite Index, which surged 73%.
This might make you wonder if Loblaw stock is a buy at its high. Loblaw stock is trading at a 1.12 times price-to-sales ratio, its highest in a year. Nevertheless, the concept of investing in things around you seems to be working in Loblaw’s favour.
Investing $2,600 right now could help you be a part of Loblaw’s immediate rally. The second quarter is seasonally high as the retailer reports a 28-30% increase in sales. Since Loblaw’s sales continue to grow in every market environment, it can hedge your portfolio even in a recession.
Who should invest in Loblaw?
These are difficult times, with many stocks showing a high degree of volatility. Automotive, real estate, renewable energy, and lending stocks have lost significant value in the last three years. At such times, many investors want to preserve their money, protecting it from losing its value.
That is where grocery and utility stocks outperform the market with their consistent returns. In a growing economy, they might underperform the market, but in economic uncertainty, they outperform.
In a portfolio, you can diversify your investments across growth and dividend stocks and allocate a small portion for such defensive stocks. In a bear market, you can increase your allocation in defensive stocks and reduce it in a bull market. While some stocks like Loblaw are buy-and-forget, they can also be used in portfolio rebalancing.
